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Making the case for spend analytics

published on January 7, 2003
on TechRepublic.com

Getting a handle on procurement spending isn't easy. But as Bayer CropScience AG can relate, it can pay off in many ways.

While required tools (such as spend analytics software that costs anywhere from $200,000 to $1 million) and integration work aren't cheap, the benefits of replacing outmoded spend tracking and analysis tools can provide a strong ROI— the crop protection vendor will save $15 million in the next three years and the corporate purchasing department is now focused on strategy rather than paperwork processing.

Spend analytics require attention

Spend analytics, and the capability to participate more effectively in business decisions, can bring varied changes to the way purchasing departments work within an enterprise. A good first step, according to Gartner research director Dave Hope-Ross, is to start with an audit of existing purchasing data.

"Look for invoice duplication, overcharges, and contractually prohibited transactions," he explained. "A lot of time there is plenty of money right there— sometimes 2, 3, or $4 million."

This plan of attack can also help a CIO make a case for bringing in new software to better manage and analyze spending. A long-term ROI of between 1 and 10 percent of the total spend, said Hope-Ross, can obviously work in a tech executive's favor.

Bayer CropScience had already had a fair share of changes even before it contemplated spend analysis integration, according to Burgess Perry, who is in charge of systems strategies and changes in business processes that support Bayer CropScience's supply chain. Two mergers and differences in the ways the merging companies collected data forced a change, he explained.

Aventis CropScience— subsequently Bayer CropScience— undertook an SAP ERP integration to address some of the challenges with purchasing data. The company then realized that 60 percent of its "spend" wasn't handled in purchase orders, giving it zero visibility in the ERP. Some 40 percent of the spending occurred in expense reports and corporate credit cards. The credit card data itself was "off the scope," said Perry.

"We spent several million dollars on purchase cards, but on what and by who, we couldn't tell."

Forcing all purchases to go through a PO system wouldn't solve the problem, either. But the purchasing group needed to see all the information in an easier fashion.

"We didn't want to have those strategic people running to IT people to get data and then plug it into spreadsheets," said Perry. Doing so would reduce the efficiency of the company's already small purchasing staff.

Perry also had few resources to throw at a spend analysis project— just 25 percent of his time and an equal amount from a developer. He also didn't want to spend time educating consultants on procurement processes.

"We basically wanted to pick something that was already the way we wanted it," he said. That way, he could just tweak the solution rather than fund a complete customization.

Finding the right tools

In seeking the right product, Perry first evaluated a supplier relationship management tool from SAP. He also considered doing a custom solution in Oracle but ruled it out because it would require a great deal of time and staff commitment— resources he didn't have. Ultimately, he chose SAS's Supplier Relationship Management product. The solution is sold under an annual license with a set base price, plus a sliding fee that adjusts according to a company's procurement spend.

The software— described as a "Porsche" among spend analysis tools by Hope-Ross— has an average price between $500,000 and $2 million, according to SAS. BayerCrop Science declined to state its costs for the thin client application, which can run on NT or a variety of UNIX mainframe environments.

Bayer CropScience's SAS SRM implementation began in January 2001, and finished on schedule about six months later. The project included integration with Bayer CropScience's new SAP ERP and monthly EDI file feeds from purchasing cards (MasterCard later replacing Amex and VISA).

Perry, his quarter-time developer, and various employees from IT and purchasing collaborated on the effort. SAS assigned a full-time project manager and senior developer. Eight additional SAS consultants also contributed to tailoring the Web-based interface and building customer reports.

"We used SAS for everything we could," said Perry, including a one-day on-site training. SAS's proximity to Bayer CropScience— a five-mile drive from Bayer's offices in North Carolina's Research Triangle Park— made it easier for the two groups to collaborate, which also contributed to the project's success.

Plan to spend time cleaning data

Though the integration went smoothly, an unexpected hurdle cropped up toward the end. In deployment, Perry learned what many leaders discover when they put supplier analytics in place— that cleaning and aligning the spend and supplier data between the systems and data feeds can be a quagmire. Properly mapping the data is a crucial step because it provides a mechanism to aggregate the spending and supplier information.

The data has to be cleaned as well. This aspect can cost $1 to $10 per SKU (stock keeping unit) the first time the data is cleaned, noted Hope-Ross.

"It was something I underestimated," said Perry. It took a manual effort to map the old data to the product codes in the new system, he added.

Since the project's launch, Dun & Bradstreet rationalizes Bayer CropScience's supplier data and merges redundancies to keep the vendor master clean every quarter. Data from the Bureau of Labor Statistics on inflation indices maps back to commodities, providing a benchmark for the prices of products. All this data helps Bayer CropScience's purchasing department do more meaningful analyses, making them a real proactive force for cost reduction within the company.

Purchasing earns its place

The spending visibility gained through spend analytics has also helped the purchasing group better prioritize the efforts of a small staff— a real improvement over the static queries and Excel spreadsheets that were used before the new tools.

"We were spending a lot of time on things that were small, like acquiring office supplies and copy machines, rather than R&D, contracts, and larger purchasing," explained Perry, adding, "We were missing a lot of opportunities."

The purchasing group now regularly meets with internal customers and is able to pull up the customer's cost centers on screen. The data consoles kick start what Perry calls collaborative discussions that begin with the question, "How can we help your business save money?"

"Very few people would question the value of increasing sales and increasing margins," said Hope-Ross. "And I would argue that this is the way you need to look at this. You really don't have a choice to put some management expertise behind improving this huge amount of spending in the quest for lower costs and improved margins."